Kodak 2003 Annual Report Download - page 24

Financials
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The costs incurred and adjustments, which total $557 million for the
year ended December 31, 2003, include $73 million of charges related to
accelerated depreciation and inventory write-downs, which were reported
in cost of goods sold in the accompanying Consolidated Statement of
Earnings for the year ended December 31, 2003. The remaining costs
incurred and adjustments of $484 million were reported as restructuring
costs and other in the accompanying Consolidated Statement of Earnings
for the year ended December 31, 2003.
2004-2006 Restructuring Program
In addition to completing the remaining initiatives under the Third Quarter,
2003 Restructuring Program, the Company announced on January 22,
2004 that it plans to develop and execute a new cost reduction program
throughout the 2004 to 2006 timeframe. The objective of these actions is
to achieve a business model appropriate for the Company’s traditional
businesses, and to sharpen the Company’s competitiveness in digital mar-
kets. As a result of the actions, the Company expects cost savings in the
range of $800 million to $1,000 million for full year 2007.
The Program is expected to result in total charges of $1.3 billion to
$1.7 billion over the three-year period, of which $700 million to $900 mil-
lion are related to severance, with the remainder relating to the disposal of
buildings and equipment. Overall, Kodak’s worldwide facility square
footage will be reduced by approximately one-third. Approximately 12,000
to 15,000 positions worldwide are expected to be eliminated through
these actions primarily in global manufacturing, selected traditional busi-
nesses and corporate administration. Maximum single year cash usage
under the new program is expected to be approximately $200 million.
Third Quarter, 2003 Restructuring Program
During the third quarter of 2003, the Company announced that it intends
to implement a series of cost reduction actions during the last two quar-
ters of 2003 and the first two quarters of 2004, which were expected to
result in pre-tax charges totaling $350 million to $450 million. It is antici-
pated that these actions will result in a reduction of approximately 4,500
to 6,000 positions worldwide, primarily relating to the rationalization of
global manufacturing assets, reduction of corporate administration and
R&D, and the consolidation of the infrastructure and administration sup-
porting the Company’s consumer imaging and professional products and
services operations. The Company expects the 2004 cost savings as a
result of these actions to be $275 million to $325 million, with annual sav-
ings of $300 million to $400 million thereafter.
The Company implemented certain actions under this Program dur-
ing 2003. As a result of these actions, the Company recorded charges of
$381 million in continuing operations in 2003, which was composed of
severance, long-lived asset impairments, exit costs and inventory write-
downs of $231 million, $109 million, $40 million and $1 million, respec-
tively. The severance costs related to the elimination of approximately
3,850 positions, including approximately 1,675 manufacturing, 1,125
administrative, 800 photofinishing and 250 research and development
positions. The geographic composition of the positions to be eliminated
includes approximately 2,550 in the United States and Canada and 1,300
throughout the rest of the world. The reduction of the 3,850 positions and
the $271 million charges for severance and exit costs are reflected in the
Third Quarter, 2003 Restructuring Program table below. The $109 million
charge for long-lived asset impairments was included in restructuring
costs and other in the accompanying Consolidated Statement of Earnings
for the year ended December 31, 2003. The charges taken for inventory
write-downs of $1 million were reported in cost of goods sold in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003.
The following table summarizes the activity with respect to the sev-
erance charges and exit costs recorded in connection with the focused
cost reductions that were announced in the third quarter of 2003 and the
remaining balances in the related reserves at December 31, 2003:
(dollars in millions) Number of Employees Severance Reserve Exit Costs Reserve Total
Q3, 2003 charges 1,700 $ 123 $ — $ 123
Q3, 2003 utilization (100) (3) — (3)
Balance at 9/30/03 1,600 120 — 120
Q4, 2003 charges 2,150 108 40 148
Q4, 2003 utilization (2,025) (48) (28) (76)
Balance at 12/31/03 1,725 $ 180 $ 12 $ 192
The severance charges of $231 million and the exit costs of $40 mil-
lion taken in 2003 were reported in restructuring costs and other in the
accompanying Consolidated Statement of Earnings for the year ended
December 31, 2003. The severance costs and exit costs require the outlay
of cash, while the long-lived asset impairments and inventory write-downs
represent non-cash items. Severance payments relating to the third quar-
ter restructuring actions will be paid during the period through 2005,
since, in many instances, the employees whose positions were eliminated
can elect or are required to receive their severance payments over an
extended period of time. Most exit costs are expected to be paid during
2004. However, certain costs, such as long-term lease payments, will be
paid over periods after 2004.
As a result of initiatives implemented under the Third Quarter, 2003
Restructuring Program, the Company recorded $21 million of accelerated
depreciation on long-lived assets in cost of goods sold in the accompany-
ing Consolidated Statement of Earnings for the year ended December 31,
2003. The accelerated depreciation relates to long-lived assets accounted
for under the held and used model of SFAS No. 144. The year-to-date
amount of $21 million relates to $20 million of manufacturing facilities
and equipment and $1 million of photofinishing facilities and equipment